A California district court pushed back on the restrictive interpretation of a standard intellectual property exclusion and found coverage for a policyholder’s patent related lawsuit. The United States District Court (Northern District of California) recently ruled that claims asserting (1) the breach of a patent license agreement and (2) patent misuse were covered under a commercial insurance policy, and not subject to the policy’s intellectual property exclusion. Moreover, the court found that the mere fact that claims are related to assertions of infringement does not preclude coverage unless the claims assert injuries as a result of that infringement.

The Underlying Action

Policyholder Tessera initiated an International Trade Commission (ITC) investigation, accusing several companies of infringing its patents by importing and selling semiconductor packages. Several of these companies were customers of Powertech Technology Inc. (PTI), a company that had obtained a license agreement from Tessera. In December 2011, PTI sued Tessera on several claims and defenses relating to Tessera’s ITC investigation, including breach of the licensing agreement, fraud and deceit, and patent misuse. In February 2012, Tessera tendered the defense and immunity of these claims under three commercial insurance policies issued by St. Paul Mercury Ins. Co. (St. Paul), which accepted the tender of defense under a full reservation of rights, but disputed coverage. After initial motion practice, Tessera and PTI resolved the action by settlement.

The Coverage Action

In April 2012, St. Paul initiated an action for declaratory relief against Tessera, claiming that the standard intellectual property exclusion in its policy excluded from coverage the claims asserted against Tessera. The exclusion at issue bars coverage for: “injury or damage or medical expenses that result from any actual or alleged infringement or violation of any of the following rights or laws: […] Patent…Other intellectual property rights or laws….” The exclusion also bars coverage for “any other injury or damage or medical expenses alleged in a claim or suit that also alleges any such infringement or violation.”

Judge Whyte initially granted St. Paul’s motion for summary judgment, but the Ninth Circuit reversed that decision and remanded the issue to the district court to consider whether the intellectual property exclusion applied to PTI’s claims against Tessera.

St. Paul contended that PTI’s allegations of breach of the license agreement and patent misuse constituted claims for damages resulting from infringement or violation of intellectual property rights, thus triggering the intellectual property exclusion. St. Paul also contended that, because PTI’s claims arose from Tessera’s allegations of infringement in the ITC action, they were excluded under the policy as claims that “result” from allegations of patent infringement by Tessera.

On June 21, 2016, Judge Whyte rejected St. Paul’s arguments, and granted summary judgment in favor of Tessera, finding a duty to defend under St. Paul’s policies. The court held that neither a claim for breach of a patent license nor patent misuse was a “claim for infringement or violation of an intellectual property right.” First, the court found that a claim for breach of a patent license is a breach of contract claim arising under state law, and not intellectual property law. Specifically, the rights involved are contractual rights, not intellectual property rights. Similarly, the court held that PTI’s patent misuse claim was not an “independent claim of injury claim resulting from an intellectual property right.” Instead, patent misuse is an equitable defense to prevent anticompetitive practices exceeding those statutorily granted in the patent right, which is not an intellectual property right. This understanding was consistent with the language from an unpublished Ninth Circuit decision finding that “there is no intellectual property right to be free from patent misuse.” (See Aurafin-OroAmerica, LLC v. Fed. Ins. Co., 188 F. App’x 565, 566 (9th Cir. 2006).)

Finally, the court rejected St. Paul’s argument that all of PTI’s claims against Tessera were excluded because they resulted from Tessera’s claims of patent infringement in the ITC investigation. Reading the exclusion in its entirety, the court found that PTI had not claimed injury or damage “resulting from” an infringement. PTI’s claims did not “depend on infringement claims” because the harm came from Tessera’s alleged false allegations of infringement. In order to be triggered, the intellectual property exclusion required that the claimed injury or damages “result from the actual or alleged infringement or violation”—something that had not been alleged by PTI.

This ruling is a victory for policyholders. The implication is that insurers cannot broadly deny any and all claims involving patent disputes. Rather, coverage will turn on the precise language of the exclusion and the allegations in the underlying complaint . . . as it should. Standard IP exclusions, like St. Paul’s, will only apply and exclude coverage for strict infringement-only actions. Disputes over licensing agreements, scope of a license, and other disputes may still be covered if the claimant alleges to have suffered damages other than those caused by an alleged infringement.

Any policyholder facing litigation relating to use of a patent should contact the authors of this blog, or any other contact in Reed Smith’s Insurance Recovery Group, for analysis on whether the claim is excluded under its relevant policies.